Payments View - August 2022

We hope you are keeping well and are winding / fully wound down for the summer break. We’ve gone for a double Summer edition this month with normal service resuming in September. For now, we have another packed edition of Payments View to help you keep up to date with key developments.

In this edition we include some commentary on the Financial Services and Markets Bill, the hotly anticipated Consumer Duty, the PSR’s response to the Digital Payments Initiative report and HMT’s consultation on Payments Regulation and the Systemic Perimeter.

If any of the topics below spark further questions, please don’t hesitate to reach out to us.

UK Financial Services and Markets Bill (FSMB)

On 20 July, the Financial Services and Markets Bill was published and introduced to Parliament. This is the most significant legislative development for the financial services industry since Brexit and is intended to bolster the UK’s competitiveness as a global financial centre. We have set out some of the key provisions for the payments sector below and will be publishing more detailed briefing notes shortly.

Regulation of stablecoins and digital settlement assets – Article 22

• The Bill brings stablecoins used as a form of payment into the regulatory perimeter, paving their way for use in the UK as a recognised form of payment. This is primarily achieved by amending the existing electronic money and payment system regulatory framework which is in line with HMT’s response to the stablecoin consultation published in April (see Payments View – April 2022 for more information).
• The Bill defines “digital settlement asset” and gives HMT power to amend the definition to respond to technological advances.
• HMT will launch a consultation on its regulatory approach to wider cryptoassets beyond stablecoins used for payments, including those primarily used as a means of investment (such as Bitcoin) later in 2022. A power to bring digital settlement assets used for payments into the UK regulatory perimeter is the starting point.

Retail cash access – Article 47

• The FCA is appointed as lead regulator for retail cash access and given powers to ensure that specified firms (i.e. banks and building societies as designated by HMT) continue to ensure the reasonable provision of deposit and withdrawal facilities.
• These powers will also apply to any designated cash coordination bodies i.e. bodies which assess the cash needs of local communities, with a view to ensuring appropriate cash services are in place.

Wholesale cash distribution – Article 48

• The Bill provides the BoE with the powers to oversee the market activities of the wholesale cash industry, to ensure it remains effective, resilient and sustainable (“the market oversight regime”).
  • HMT will designate entities as being within the regime – all entities which provide wholesale cash activities or provide financial support in relation to these activities, could be brought under this regime.
  • HMT can also designate service providers under the regime.
• If HMT designates an entity as being of systemic importance to the wholesale cash industry, the Bank of England will have the ability to regulate it prudentially.

Increased protection for APP scams – Article 62

• The Bill amends the Payment Services Regulations 2017 so that the Payment Services Regulator (PSR) can use its regulatory powers (whether in relation to payment system operators, payment service providers or in combination), to require mandatory reimbursement by payment service providers in cases of APP scams. In effect this change makes PSPs directly liable for APP fraud.
• The Bill also places a duty on the PSR to take regulatory action on APP scam reimbursement by participants in the Faster Payments Service.

Consumer Duty

We have flagged the upcoming Consumer Duty in previous editions and the final FCA Policy Statement on the Consumer Duty (PS22/9) and the finalised guidance (FG22/5) have now been published (27 July). We’ve pulled out some key takeaways below.

The implementation timeline has been confirmed as being phased with a deadline of 31 July 2023 for all in scope new and existing products and services that are open to sale or renewal and 31 July 2024 for closed products and services.

For the payments sector, the FCA have made it absolutely clear that the Duty applies to payments and e-money firms and added more references to the PSRs and EMRs. There are a few useful examples that help to answer the long running question of exactly what the impact of the Duty will be on payments firms, particularly on the distribution chain side where we have pulled out the following that should be considered by EMIs, safeguarding banks, acquirers and TPPs:

“In the payments sector, the Duty applies across the distribution chain and will apply to all payment services providers where their activities can determine or have a material influence over retail customer outcomes. Distribution chains may look different from other sectors. For example, a distribution chain may include an e-money issuer and agents and distributors that carry out activities on behalf of the issuer. The issuer may design the product or service that is then distributed by agents or distributors. It is the issuer’s responsibility to ensure that agents and distributors comply with the Duty when providing services on behalf of the issuer.

Another example of a firm in a distribution chain in the payment sector may be the credit institution that safeguards the funds of payment or e-money institutions. Similarly, a payment chain may include payment initiation service providers in addition to the account providers executing the payments. It may also include acquirers to the extent that their activities determine or have a material influence over retail customer outcomes.”

PSPs will also note the mention of COP / APPF which we think will be one of the main areas requiring uplift to meet the new requirements.

One particular point to note for all firms is the introduction of two new interim milestones of 31 October 2022 for boards to sign off Consumer Duty implementation plans and be able to evidence such plans have been scrutinised and challenged and, 30 April 2023 for ‘manufacturers’ to complete reviews of existing open products, sharing information (where appropriate) with distributors.

As always, we would be more than happy to discuss your plans for addressing the Consumer Duty.

The PSR response to the Digital Payments Initiative Report

On 21 July, the PSR published its response to the independent PSR Panel's digital payments initiative report that was published in May. The Panel identified barriers to people using digital payments and made recommendations to the PSR to address them (we looked at the report in Payments View – May 2022). The response addresses the 12 recommendations from the Panel in turn. The PSR’s efforts will be focused on removing barriers to new digital payment services rather than other factors such as digital exclusion, but the PSR will challenge payment system operators to consider consumers with limited digital and financial skills in the design and rollout of their digital payment services – likely to be another area impacted by the Consumer Duty.

In order for the drive for wider adoption of digital payment services to be successful, the PSR notes that understanding the drivers for reliance on cash is paramount. This understanding may shape new digital payment services that address the needs of consumers reliant on cash, such as avoiding overspending, concerns about fraud, lack of financial capability and/or digital skills.

The PSR would like to hear more from consumer representatives and explore what more card and other payment system operators could do to facilitate the availability and use of digital payment services to ensure the project plan meets consumer needs. They will be coordinating with the FCA and engaging with the FCA Consumer Network to achieve this. This will further one of the key outcomes in the PSR’s five-year strategy, that all consumers have access to payment services that meet their needs.

Payments Regulation and the Systemic Perimeter: Consultation and Call for Evidence

On 20 July, HMT published a consultation and call for evidence to explore reforms to the systemic payments perimeter under supervision of the BoE. Currently, the BoE is responsible for supervising payment systems recognised as systemic, and associated service providers, under Part 5 of the Banking Act 2009. HMT has formally recognised nine payment systems, including Bacs, CREST, Faster Payments, LINK, and one associated service provider for supervision, Vocalink. The purpose of the regime is to ensure that systems performing critical, concentrated and hard-to-substitute activities are supervised for the financial stability or economic risk associated with their potential disruption or failure of service.

Since 2009, there has been significant evolution in the payments sector due to legislative and technological developments and evolving user preferences. The result is that systemic actors are unlikely to be concentrated within the payment systems themselves. HMT is therefore consulting on whether the scope of the Banking Act should be extended to cover payment service providers (“PSPs”) where their disruption poses material risk to the UK financial system. This approach would move the regime towards the HMT’s favourite principle of “same risk, same regulatory outcome”, rather than focusing on an entity’s form.

In order to effectively regulate the market, the BoE would need additional powers (e.g. information gathering powers). Therefore, through the consultation HMT is asking for industry views on the current regulatory framework and its proposed approach for expanding the systemic perimeter. A central point is the potential for overlap with the FCA.

Currently, the supervision of authorised PSPs falls within the remit of the FCA and there is limited regulatory overlap with payment systems. By extending the systemic perimeter to wherever systemic risk may emerge in payment chains, there is likely to be regulatory overlap. Therefore, HMT is consulting on the model of regulatory cooperation. This would be similar to the approach proposed for systemic stablecoins used as a means of payment under the Financial Services and Markets Bill and is likely to be a useful basis.

Some of the main points from the consultation are set out below:

Future Regulatory Framework Review

The consultation sets out how HMT is approaching the application of the outcomes of the Future Regulatory Framework (FRF) Review to the payments regulatory landscape. The FRF Review is focused on the FSMA framework which payments does not form part of. The FRF Review proposes strengthening the accountability and engagement mechanisms between the FCA and HMT. HMT expects this to apply to the FCA with respect to its regulation and supervision of the payments sector. In addition, the government intends to modify retained EU law to provide the FCA with a general rulemaking power for the payments sector. HMT asks for feedback on its proposed approach to aligning the FRF Review with the payments sector.

Extending SMCR

The consultation asks for feedback on the proposal to extend the application of SMCR. In June 2022, HMT committed to implementing SMCR for recognised payment systems and specified service providers. If the BoE’s systemic perimeter is expanded as the consultation proposes, HMT considers that SMCR should also apply to these firms and that the payments sector in general would benefit from SMCR applying to these firms as it would enhance individual accountability and mitigate risks of consumer harm. This would clearly be a significant change for the industry and have a high impact given the number of payment and e-money firms currently operating in the UK.

PSR’s legislative framework

Finally, the consultation makes a number of proposals related to the legislative framework of the PSR. This includes a proposal to simplify the regulatory regime governing access to payment systems. The UK has overlapping regimes as a result of its membership of the EU and it is unclear which takes precedence. HMT views the domestic regime under the Financial Services (Banking Reform) Act 2013 as simpler and more effective and proposes removing the regime under Art. 103-104 of the Payment Services Regulations 2017.

In addition, it proposes that the PSR be able to impose a penalty for knowingly or recklessly providing misleading information to the PSR. The PSR has power to request information but has no powers to issue fines if the person fails to comply or provides misleading information. Introducing such a power would further align the PSR’s powers with the FCA.

The consultation closes on 11 October 2022 and HMT expects to publish a response in 2023 following stakeholder engagement. The consultation covers a broad range of issues and we would be very happy to discuss any of them with you and/or help with drafting a response.